Chapter 4
Current Liabilities
213
Critical Thinking
CT-1 (
8
)
Contingent liabilities arise when the payment of a liability depends on uncertain future
events, such as the result of a lawsuit.
Current accounting practice requires that when the payment for a contingent liability is
probable, and the amount can be reasonably estimated, the amount must be accrued on the
balance sheet.
Is this practice reasonable, (in light of the fact that the liability is not definite and only
estimates are used)? Does this practice mislead owners regarding the actual state of affairs
surrounding liabilities? Discuss.
